Adopting Fresh Start Reporting when Emerging from Bankruptcy

Estimated reading time: 2 minutes 30 seconds

The article in brief:

  • Amid the market disruption created by the coronavirus shutdowns, a wave of bankruptcy filings is likely ahead for many businesses.
  • For companies that will emerge from bankruptcy fresh start reporting will become necessary, subject to meeting criteria under ASC 852.
  • To meet these requirements, companies will need to work with their valuation professional and establish reorganization value.

After a tumultuous March and April, the cure for the market volatility created by the disruption of the novel coronavirus may be worse than the disease. Even with a massive infusion of federal funding for businesses, a rise in bankruptcies is beginning.

More bankruptcy filings may be coming for companies with high degrees of financial leverage – particularly those in some of the hardest-hit sectors such as “discretionary” retail (as opposed to “essential” retailers that carry food, cleaning supplies, and pharmaceuticals), transportation, travel, and leisure – that are unable to find other restructuring financing options to avoid default.

ASC 852 Establishes Criteria for Fresh Start Reporting

To the extent that companies can survive the crisis, restructure their debt, and ultimately emerge from bankruptcy, fresh start reporting will become a critical issue. Public and private entities that emerge from Chapter 11 bankruptcy may be subject to Accounting Standards Codification (ASC) 852.

Under ASC 852, entities that meet certain criteria are required to adopt fresh start accounting. The accounting treatment calls for a debtor entity to use fair value concepts to determine its reorganization value and establish a new fair value basis for financial reporting, which includes measurement of the fair value of the assets and liabilities of the company.

According to ASC 852-10-45-19, an entity must meet the following criteria to adopt fresh start reporting:

  1. The reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims.
  2. Holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity.

To the extent that companies can survive the crisis, restructure their debt, and ultimately emerge from bankruptcy, fresh start reporting will become a critical issue.

Fresh Start Reporting when Emerging from Bankruptcy

Reorganization Value

In applying fresh start accounting, the company emerging from bankruptcy allocates its reorganization value based on its estimated fair value. The reorganization value is the price a willing buyer would pay for the new entity. The reorganization value is the basis for the emerging entity’s fresh start reporting process and is often determined during the bankruptcy process based on pro forma cash-flow projections that become part of the reorganization plan.

For accounting purposes, the emerging entity is treated similarly to how a new acquisition would be treated. As such, the entity must follow the accounting rules for business combinations outlined in ASC 805. The reorganization value of the entity must be allocated to the company’s assets and liabilities in accordance with the procedures set forth in ASC 805. If any portion of the reorganization value cannot be attributed to specific tangible or intangible assets of the emerging company, such amount must be reported as goodwill.

The valuation analysis must also comply with ASC 820, which requires an understanding of the major concepts around fair value measurement for financial reporting purposes, including exit price, highest and best use, market participants, and the principle market.

As a result of adopting fresh start reporting, a new entity emerges with no beginning retained earnings or deficit. Financial reporting for the new entity requires resetting the values of the assets and liabilities on the balance sheet to fair value.

Certain disclosures are also required for fresh start accounting purposes, including the following:

  • Adjustments to the historical carrying values of assets and liabilities
  • The amount of debt forgiveness
  • Significant issues pertaining to the reorganization value, such as the methods, variables, and assumptions used to determine the valuation case


Complying with fresh start accounting rules requires an understanding of valuation principles and methodologies. An independent valuation firm with experience in these types of engagements is a critical partner for companies as they prepare to emerge from bankruptcy. For questions pertaining to fresh start accounting, and to learn how we can apply our expertise to your situation, contact your VRC valuation professional.